Why the 401(k) won’t fix the U.S. retirement crisis

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Kyla Ernst-Alper is an aerialist in New York City. She’s never had an employer that offered her a 401(k) retirement plan in more than two decades of performing.

Giles Clement

Kyla Ernst-Alper, a 38-year-old aerial performer in New York City, has never had a 401(k) retirement plan.

She holds multiple jobs at once to support herself, and none of them offer her any retirement options. She socks away what she can in an individual retirement account, but those savings are not always consistent. That’s due to her line of work, which was especially hard hit when live shows were canceled because of the public health crisis.

“Before the pandemic, people in my community were barely paying their bills,” Ernst-Alper said. “You’re lucky if you’re able to save money.”

The 401(k) is framed today as the main way for Americans to save for retirement, especially as traditional pensions become less common. However, a large share of workers, particularly low-income earners, women and people of color, are left behind by lack of access to the plans.

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Overall, around half of private sector workers aren’t covered by an employer-sponsored retirement plan, either because their company doesn’t have one or because they’re not eligible for the one offered, according to the Center for Retirement Research at Boston College. In addition, a growing number of American workers generally can’t access a 401(k) because they’re contractors or self-employed.

Those who don’t have access to an employer-sponsored plan can fall behind without perks such as employers’ matching contributions or the auto-enrollment of employees. As a result, 1 in 4 American workers don’t have even $10,000 saved for retirement.

“For many demographic groups, the typical working-age household either has no retirement account savings at all or only a trivial amount,” said Monique Morrissey, an economist at the left-leaning Economic Policy Institute.

They will face a greater risk of poverty in retirement.

Catherine Collinson

CEO and president of the Transamerica Center for Retirement Studies

To be sure, experts say that while 401(k) plans have their problems, they shouldn’t be discontinued. When utilized, they can be powerful savings tools — the average 401(k) holding of an investor in their 20s in 2019 was $10,500, according to Fidelity. Those in their 30s had an average of $38,400 saved, while those in their 40s, 50s, and 60s had averages of $93,400, $160,000 and $182,100, respectively.

“I don’t mean to say, ‘Get rid of 401(k) plans,'” said Steve Vernon, a consulting research scholar at the Stanford Center of Longevity. “I just mean they need to be improved.”

That improvement should take the form of more access, said Nevin Adams, chief content officer at the American Retirement Association.

Indeed, when people are offered the chance to save in a 401(k), they take it. According to a survey by the Plan Sponsor Council of America, nearly 90% of employees who had access to a 401(k) at work in 2019 made contributions to their plan

Here’s who the plans currently leave behind. (Many people fall into multiple categories.)

Small-business workers

Low- and middle-income workers

Gig and part-time workers

Danny Samet, 28, has been saving for retirement through a few different investment accounts, he said. As a freelancer in the music industry, he’s never had an employer-sponsored retirement account.

Chase Kensrue

People of color and women

Jenny Lezan

Source: Jenny Lezan

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